Selectively Falsifying Financial Statements

Discussion Case Study for Test 1-Part II
The controller of the XYZ Global Systems Inc. has developed a new costing systems that traces the cost of activities to products. The new system is able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in a manner that provides a more complete view of the company’s product costs. This system produces better strategic information about the relative profitability of product lines.

In the course of implementing the new costing system, the controller realized that the company’s current-period GAAP net income would increase significantly if the new product cost information were used for inventory valuation on the financial statements. The controller has been under intense pressure to improve the company’s net income, and this would be an easy and effective way for her to help meet the company’s short-term net income goals. As a result, he has decided to use the new costing system to determine GAAP net income.

Why does the company’s net income increase when the new costing system is applied?
Is the controller acting ethically by using the new costing system for GAAP net income? Explain your answer.